We Have Seen a Doom Loop in EM, Santos Says

Bloomberg dot Com, and of course on the Bloomberg. The big theme though, it is what is happening in emerging markets, with Turkey's financial markets very much sinking, the Lyra hitting a record low, bond yeal hitting a fresh record high, the tenure yeard preaching for the first time ever, and yet investors are confronted with the sound of silence, the central Bank and government so fast seemingly nowhere to be seen. Joining us here in New York is Gabrielle Santos, JP

Morgan Asset Management, Global market Strategist. Good morning to Gabby, getting morning. So where are they west? The government, west, the central Bank. That's that's a big question, right, I mean, if we remember how this all started for Turkey really was mid April when the dollar started to strengthen, and it really brought out the emerging markets that we're seen as particularly vulnerable, Turkey being one of them, Argentina being another. That's spoken of in the same breath with a similar

current account deficit in US dollar debt. Now, Argentina has taken steps right and big steps. It's raised interest rates, it's set up a large physical austerity program, it's sought help from the I m F. Whereas Turkey we haven't heard anything. And so that's where I think sentiment is very, very tricky and Turkey now and we need to see some sort of steps from them in order to improve

investor sentiment. Have we entered the classic E M doom loop where the currency weekends markedly, worries starts to rise about the debt being financial? Do you know the doom loop? Tom? Welcome back, by the way. That's an entrance too into the show. Do you start with good morning or just jump in doom loop? Do you know what a doom loop? What does the doom loop? The feedback loop and negative self fulfilling feedback loop. You don't know what wants to

talking about traffic the South. I think Mrs Kean was mentioned in that to me. I think you were in the doom loop in the cane house that we can talk about that in a continuous and this becomes self fulfilling gabby in the sense of the currency weakens, people start to worry about the debt being refinanced, and it feeds back into a wikied currency, so the wikied currency begets a wicked coouncy. And we have been seeing that, right, I would say, for for a few emerging markets over

the past few months. And that's where you do need some sort of action to break that loop, right for investors to feel like we are in a vulnerable position right now, but there are actual steps being taken to improve so that the future looks a little bit brighter than it does right now. With the tapestry over that is this width between a booming United States and a

few selected economies and everybody else. I mean, I get the idea that select em countries are idiosyncratic, but I know all of our audience is saying, yeah, but wait a minute, we're booming and they're not. At some point that catches up with you, right, And I do think that's one of the major drivers behind this very very strong dollar rally we've seen since mid April, the idea that the US is booming compared to the rest of

the world. But there's one thing that we can do, which is look in the rear view mirror and notice that dynamic. And there's another in terms of looking over the next six eighteen months and think, well, is this dynamic going to hold? Is the US going to continue to boom so much compared to the rest of the world.

And we would argue that four percent g d P was a one time occurrence, that is not going to be the dynamic and that be done smoothly, or do we get brutal moves assuming that I mean someday we're gonna come out. Let's say you're right, and Bruce Casman's right, and someday we're gonna come out and go, oh, we're not going to do three point eight or four percent GDP. The run rate is going to be two point x

or whatever it is. The assumption is that happens with controlled, measured moves, and these other asset classes, including the stock market says who, So, I do think there there is to be fair right and understanding in the investment community that four percent is not sustainable. But there is still a bit of a focus on three percent growth over

the next twelve months. But our view is that that is not a permanent shift in terms of potential growth that we do decelerate down to two percent in the second half of and the sooner we start focusing on that, um, the smoother the process can be in terms of dollar adjustment and market adjustment. The thing when you're advising clients on portfolio mix or what to do with new cash, etcetera. The basic idea is the United States. To borrow phrase from Mr Farrell, which I love to do, we're doom

loop free, right um. Doom is a is a strong word, but other than that, we're doom loop free, right Um.

I do think that, to use another d word, right, that there is a deceleration that we see in the US over the next twelve and eighteen months, and so US assets, the shining star over the past six months won't shine so bright in that kind of scenario compared to the rest of the world, especially if you compare it to emerging markets, which was coming from a very tricky spot there for many many years and has the potential to keep accelerating over the next couple of years.

What were seeing in Turkey? Do you see contagent risk? So at the moment, we do not, right, And I do think that there is an understanding that Turkey is a very particular case. Here we mentioned its vulnerabilities in terms of current account dollar DAD as well as it's uh we could call it an orthodox approach towards economic policy. I think that there is an understanding that other emerging

markets are different. Um, there is an understanding that, you know, we shouldn't punish all emerging markets to that same extent. I thought it was really interesting what we got from China f X reserves overnight. Many people thought they'd see a decline. We didn't. We got a slight rise in China effects reserves. What's the signal you take from that gaping So if we think about why we were so concerned about China's effects reserves, why this release took on

a whole new importance in our calendars. It was really during when we started to see yu want depreciation, and there was a concern that the Chinese government was using up a lot of its effects reserves to shore up the currency to have a controlled depreciation of the currency, right, And so it's it's very very positive to have seen over the past couple of years much more stable effects reserves.

It sends the signal that there isn't an out of controlled depreciation in the yuan, so we do feel generally, I would say okay with the outlook for China, especially in the second half of the year. We have seen a lot of fiscal and monetary easing over the past few weeks and that should feed through to it to an acceleration in Chinese expect Do you expect to see

more more easing? I think right which China is always a bit of a balance between trying to ensure uh some good economic growth at the same time not give up completely on reforms of when we think about all of the credit that China has build up, so I think it's it's a tough balancing act and as long as the economy starts to pick up, then the Chinese government won't want to do too much and just just very quickly here. I mean, the vics spiked down to

ten point five two today. But once again in the US markets, all the doom and gloom guys have been wrong. Have you ever seen anything like this or like John to me, it's Friday. Everybody publishes on Friday their doom and gloom article of the week, and I'm sure sometimes they'll be right, But the fact is the VIX is eleven point zero one under with a ten handle earlier. I mean, how do you deal with that professionally, because

I know you're getting it from clients, right. We do, we do, and and to be fair, we want to focus on the risk. We want to think through them. But at the same time, we also want to take a look at what current situations are. Right. And if you look at the backdrop for the US market, it's a solid economic backdrop. We spoke about deceleration, but it's still expansion. It's still growth. It's not recession, um and and as a result, profit growth can continue at a

very very healthy pace. UM. So we do try to think through the risk. The one we are still focusing on our trade tensions, um. But we don't want to react to rashly, right as as long as the current fundamentals look positive. Okay, this has been great. Get Real Scientists. Thank you so much, greatly, thank you so much this morning. John.

I don't know what your favorite team is. I don't know what Steve Major's favorite team is, but I think you both don't like Arsenal Right, you'll bring in Mr Major and I Steve supports it's West Ham isn't it, Steve. That's right, John, you're a happy man looking forward to the season. Yes, I'm looking forward to it, looking forward to the scene, Steve Major, East London's finest. There you go.

I'm trying to teach it. HSBC's global head of Fixed Income Research, Johning us Now, Steve, what are we getting wrong in the fixed income market? Still that you have to spend a lot of time explaining the clients. Well, the five percent number was quite funny this morning. I'm not sure whether the JP Morgan Research department have written anything that's got a five percent. Believe they have not.

And I'm just wondering what would happen here, Whether if Stuart Gulliver had done that, our ex head so now it's John Flint. If John Flint had done that, I wonder what would have happened here? What would you have said, Steve? What would you have said if well done that a couple of years ago. There's a fair bit of a fair bit of work get into these research reports and they're done with some consideration. It doesn't make them right.

We could always be wrong. But you know, I'm beholden to my colleagues to justify everything I say and think, and if I go across the line, they'll pull me back. So we've got a published number that's two point three, and that number hasn't changed for the last twelve months, and every day of the week I'm out there defending it. The thing is with botons, the forecasts aren't wrong until

we get to the forecast date. And our forecast is for the end of this year and the end of next year, and I'm thinking, look, I'm not wrong yet, and to be right, you just need the yield to be lower than the forward is implying. So this year we've had a hundred and fifty trading days and only on nine days did the US tenure treasury close at three or above. So if you've been sure the tenure treasury is, it's been quite painful for most of the time you've given up the coupon. So look, five PC.

It's a number the FED says they're going to go to about They're not saying they're going to go to four. To have a five ten year yield. The Fed's got to be at for and change, and you've gotta have inflation going above the FED target. That might be a possible scenario for the future, but I wouldn't give it a probability of waiting of more than five or ten percent. I would attach at probability to the idea that the FED stops at one of the next two or three meetings.

And you when you when you wait all those scenarios up, you end up with a forecast that has a two handle, not a five handle to stay a lot to one pank Here, let's just pick up on the point about the Federal Reserve. What's going to problem? What's the catalyst for them to stop in the next two or three meetings. Well, look, the way I describe it, Johns has been plenty already this year. It's like a bucket filling up and at

some stage to bucket just overflows. So if you imagine that bucket you've got, you call it a bucket in America, I think whatever it is a bucket. You have this radio London. Yeah, so you have you have a you have a leaking roof, and you have drip drip, you know, the drops of rain water fill the bucket up. At some stage it overflows. For me this year, it started with FRA O I S. Then there was the cryptocurrency collapse, then there was reverse fix, and just about every emerging

market sequentially has been in play. Is there a common denominator, I ask you, And what the answer to me is, Yes, there's there's a huge d leverage. The FED is exporting a tightening of financial conditions around the rest of the world, and all of the tourist money that has flown from one game to another has been sucked out. So so yes, the the tightening of policy in the US has consequences, and we can see it everywhere. And you go to Turkey,

go to go to China. You have a look at what's happening in these markets that they've all been there, you know, in the last few months. It started with Argentina, it went through various points along the way, Mexico, Indonesia, India, most recently it's Turkey that that's the one if one's talking about, but also China. All of these markets are in focus. And I think it's because of the tightening of financial conditions that the US is exporting to the rest of the world. And so you asked me what

stops the FED. I just think a few more drips in the buckets and it will overflow, and you know that the traditional reaction function would be a strong dollar. That's starting to happen in some in some ways, or it's the incoming data. And as there are a bunch of economists in the FED who are looking at incoming data, it might take weaker data to bang them on the back of the head to wake them up. But to me, it's incredulous to just think that nothing happens. So let's

talk about thirty a US. How should you position elsewhere? Long duration in the US you have to be long long to us with with with a continued flattening bias, because look, I'm not denying the Fed's going to hike in September. They might even hike in December. Although we'll have to look at the post midterm election emprovement. We have to we have to look at what Italy does to this bucket of water that's filling up. Well, I go to the Book of Water. But Steve, this is

important and this is for Global Wall Street folks. Duration is the length of the bun. How brave are you to buy price higher yield lower is measured out the yield curve. How far out are you willing to go, well, I'd keep going into the ten year plus. You would

go into ten year plus. Yeah, ten year plus. The worry at the moment for people in the very long end is that you've got some stuff coming up in September October around the tax reform and how the pension's market is that some people are worried about some steepening and you're you're not concerned, Steve Major about the fiscal polity. It's the buying opportunity. Any cheapness is of buying opportunity. Look, look, ten year plast this year, you've been pretty safe sitting there.

You haven't had that many bad days and you grab and I get yeah, so you know, as long as you don't too much. I think the first few weeks of this year were bad for the bond guys. But but the last six months, so that takes me back into sort of late Joan early fab. They've been fine, but not moved. It's been in a range. How long do you feel I mean, I mean, do you feel like a lonely car here of Laurie yields you and Gary.

I do feel I do feel. I do feel quite lonely, and I've just I've continued to add to my long position on weakness. So you know, I don't change the view. And actually it's not because I've got my head stuck in the standards, because I believe it. And actually, in my experience, the best forecasts that we've ever had have normally involved as being quite lonely, and it's normally a

good sign. When when people start to say you're wrong and and you start to look like a bit of a loony when people think you're mad, then then it's normally a good sign. So we're getting to the point now where we are the Mavericks on our own, and I'm quite happy with that. Giving Tom Kine some ideas there they please don't makes you thank you so much. Really, we're gonna lead our podcast, I hope today with this really wonderful. We have a lot of funny here. It's

sort of like after the Market. I know, I'm supposed to talk Zello or this or Turkishly or forget about it. City Group has done a brilliant analysis of what is permeating your house. Now for those of you have a certain vintage uh you know, there's a seventy eight record in the needle that you have to put in and you know it prick your finger. And then there was LPs, and then there was cassettes and c d s and CDs were lousy, then CDs were good, and now they're streaming.

Is a City group has really looked at the state of the music business. Tim Signers joins us right now ahead of their European You've forgot eight tracks by the way, oh you excuse me, I forgot eight tracks that was underneath the um the glove compartment as well. Tom. When you put this report together with five six seven City Group, guys, what was the number one surprise with the new economics of the music business? Really cool? Thanks for having me, Tom. Yeah, well,

I'm going to say there's two surprises. I think, you know. The first one actually was I think we've got accustomed to the idea that the music industry was challenged. You know, we've heard a lot about how rewarded music was under pressure, but actually the music music industries in relatively good health. It's growing in pasted its historic peak kutchures two thousand and six. In the US, consumers are spending three billion dollars a year on music in some way, shape or form.

The issue is only a tiny fraction of that goes to the artist. I think that's the real killer point from this. We it's going up, but it's around of industry revenues end up with the artist, which is much much lower than you'd expect the talent to be getting based on what we see another industry. Well, this has been true and it used to be seven percent and

now it's up to a week double digit statistic. But the bottom line is, am I right that in the modern music business, the talent only gets it from gate from concerts, and that means it's only a certain percentage of the talent. If you're an artist that doesn't have gait, you don't survive, do you exactly right? I mean, the main main driver of it moving up over time is is exactly that. It's it's it's the rise and um in live events and as you say, that disproportionately benefits

the big artist. But what it also speaks to is that is just how complex this industry is. You've got we call it the blob, but you know, the music industry, there are so many different intermediaries, all breaking their own cut, and that's really where we're likely to see disruption in

are you? Where? Where is the disruption for record companies that used to be twenty or thirty record companies and there's always a maverick one like Reprise Records, or you know a couple of the British record companies as well Stigwood and their crew a million years ago. But where are the record companies right now? Does anybody still care about Columbia and the big red dot. Yeah, no, I think that's there's still very big companies and still very

important players. And certainly when we think about their control of catalog, it's it's obviously very very strong, but it really is a question about what's going to look like in five, ten, fifteen years time. Remember those record labels. The big thing they had was they owned recording facilities, which were really difficult to to to to organize your of as an artist. But most artists can now record

musics on a laptop. You know. They owned manufacturing facilities to make the eight tracks from the vinyl that we were talking about, but you don't need that books you can distribute online, and of course they owned marketing and distribution, and obviously artists can do a lot of that work themselves, so it's it's really not about the the legacy business, which is still quite robust and the value of catalog

quite high. It's about where's the business going forward? And do you as an artist really need to use a legacy record label in order to to make money in recorded music? And increasingly it looks, you know, the answer to that is well not really. Could the Beatles happen today? Absolutely, I think you know the Beatles, you know, we've seeing lots of exciting new artists are very dynamic and exciting time.

I think the big thing is, you know, would the Beatles need to sign up with a with a with a with a record labor because they do it themselves and and and you're seeing a number of interesting artists that are doing in exactly that Macilmore Chance the Rapper. These are all artists who have built their own director consumer business models and and there much better off financially

for it. I mean, I'm watching right now with our studios, folks of the stack of TV is always keeping us and the rest of the news and ad for Kenny Chesney of Nashville out with three or four opening acts doing the Arena tour. I mean, those those rare acts are still bringing in tons of money, whether it was Arianna Grande at the Manchester Concert or Mr Chesney doing it in New York City. I mean, the big arenas

still matter, don't they Absolutely? I mean the big the big driver of the industry growth and the way that we define it, and certainly the big driver of artists share of industry is live events. Absolutely. And I think one of the things that is striking about the music industry that stands is just how stratified it is. By and large, record labels are still record labels. Constant promoters are still constant promoters. Distribute platforms are still distribution platforms.

And I think one of the big things that we think will happen as disruption impact is you'll see more vertical integration and actually live events is probably going to be the big area of focus, and companies like Live Nation um set to benefit from that because that's the area ultimately the artists are focusing on, and ultimately the area that the other players in the music industry are going to watch to bring into the folds. In the time, we've got left, We've got Spotify, we've got Apple Music,

we've got Amazon trying to get into streaming. Does City Group have a prediction of who wins the streaming battle? Um Look, the big point we make on streaming is simply that it's not clear any of them will ever make a really sustainable return. The big question is, of course, whether this matters for companies like Apple, Google, Amazon, ten cents. Um. It may well be that music is just the tool to drive engagement and loyalty for other parts of the

of the of their platform. The fundamentally that makes life very very difficult for the stand alone players who have to try and make a return on on on the basis that it's a stand alone business and that who we think is a factor that will drive um vertical integration or at least have pushed towards it. But the question, of course is whether this is organic and happens slowly

over time, or is inorganic and involved. Umman, what what just one final question if we could and if your brieferst on YouTube, it's it's been there's YouTube TV now, which a lot of people have told me is too expensive in that But can Google in YouTube play in the streaming world or is it just sort of the haphazard feel of finding a song on YouTube that it seems to be right now. Yeah, well I M alphabet or Google is is covered by my colleague Mark May.

But the point he makes is that the size of music within this sort of alphabet complex is relatively small. You know, YouTube generates about seventeen billion dollars of AD revenue and we we estimate about three billion of that is music related, so it's substantially five per cent of the total, but you know it is it is an

important area of focus. Um uh. They need to improve user engagement and time spent on the platform, and there are a lot of other players sort of pushing hard in that to try and use music as a as I say, something to engage users on their platforms. So even though it's small there economically, we do think it's going to be a key focus for the group. I congratulate you guys and going outside the box. It's great to see. I mean, there's a lot of these things

that are contrived. This report from City Group is not contrived. It's a very serious look at again a forty three billion large business. Thank you Tim single Hearst for joining us, and you mentioned Mark me. Their internet analyst Jim Suva Wing in here as well Alicia yeah as and and many others as well on the music business from City Group. We protect the copyrate of all of our guests. Please get that. Please get that report from your City Group representative.

Tom Singlehurst was City Group. Thank you so much. We thought we'd dragged Steve Weisman nine on a summer's day really to talk about one stock, of course, Mr Iceland with Newberger Berman and someone who looks at things long and short as well. Steve, how did you discover zello? How did you you know within the matrix of a thousand stocks or five thousand stocks? How did you wander into zillo um? You know, there are lots of different ways to find stock. Sometimes you find them on yourselves,

sometimes people given to them give them to you. This was a stock that's been covered by a cell side analyst named Brad Safilo at a small boutique called p A A Research. I've known him for years. He's an excellent analyst. You know, sometimes he's right, sometimes he's wrong, but he's always incredibly interesting and does incredible research. And he put me onto this. What you heard there from Mr Eisman, Folks is the way pros used the cell side.

Whether the right or wrong isn't the litmus test. They always want to be intrigued right or wrong. Do you treat a stock that you're cautious on that you could short differently when it's a smaller stock like Zillo versus some genormous company, Um, not necessarily. I mean, if the stock has a very very heavy short interest, I tend not to want to let people know that. I'm sure this has a fairly large short interest, but I think it's there's some things happening that make it incredibly ripe

for being short. I mean to sound significantly today, but I think it has much more downside. Well, okay, short interest is about thirty and a half percent. What about Zillo causes you to be bearish? Well, there are two things that came out that that that I want to focus on. Two things. One thing that was discussed on the call, and one thing that was not so Zillo is largest businesses you go on the website to look for look to buy a home. That's not what I

want to focus on. They got into a business several months ago. They announced that they were going to go and invest their own capital and buy houses. And then, by the way, I described it on your on your show two weeks ago, I said, and I said and flipped them, and they had projected that they were going to generate about twenty to forty million dollars in revenue this year. I'm sorry to two D fifty five million

revenue this year, and they reduced it to um. Just people just do that again because people aren't writing it down, but but we are. Just they were going, they said they were going to generate a D twenty five to two hundred and fifty five million in revenue from this business this year, which they just started, and now they've lowered that guidance to twenty million. When asked on the call why, they said that they were giving people offers, but it was taking much longer for those offers to

be accepted. Now, I what I said on your show was I thought this is a horrible business because I thought this it was cyclical, capital intensive, um and low margin. And after listening to that call, I take it back. It's not a horrible business. Business that is potentially disastrous because what they basically described is that they are offering consumers a free put. In other words, they give it, let's say it consumer puts his house on for three

hundred thousand dollars. Zilla will offer a ten percent, let's say, a ten percent discount two D seventy thousand dollars. And what's happening is these are not distressed sellers, and these sellers are taking that offer, and basically they're shopping it. They're looking for a better price, and essentially what Zilla is doing is offering consumer the seller a free put. The reason why this is so bad is that they're going to be horribly adversely selected. Think about it this way.

The house, for most Americans is the major store of their wealth. So Zillo shows up with that two hundred seventy thousand dollar offer. Now, why would a non distressed seller sell their home for two hundred seventy thousand dollars if they're not distressed. If the house is worth three hundred thousand dollars, there's only two possibilities for that. Either one, Zillo has missed priced the house and it's not worth

two d seventy thousand dollars. Is it's worth less, or there's something wrong with the house and maybe on the surface it's worth three dollars, but it requires considerable repairs and maybe it's only worth two dollars, and so the seller now accepts the the prices Zilo, which is too high. So I cannot think of a single business ever that can function by offering sellers a free put. It it be like going to Goldman Sacks and say, hey, I own X amount of IBM stock. I want to buy

some puts to protect my position. What will you charge before him? And Goldman says nothing. Well, of course I'm gonna take that. That that is essentially Zilo is creative. I mean, you describe nothing pretty straightforward. What I don't understand it. They think somehow they're going to crack some crazy code. But I don't think they understand that by

offering a free put their being adversely selective. Let me just continue for a second, because there's something that was not discussed on the call, which in some ways I

think is equally as important. Um. On June, Zillo did an equity offering and they raised hundreds of millions of dollars between June and and August six last night, there was considerable and there has been insider selling, and now less only a little bit more than a month after doing that offering, the company has has reduced guide insignificantly, and as of today the stock is down right now seventeen and a half percent. Now, this is a little bit of what did they know and when did they

know it? Um, maybe they did not know that they were going to reduce guide in significantly on Dune twenty eight, but it seems to me that that's a question that needs to be addressed by management and was not raised on the call, and it needs to be raised. I think they raised about three d and seventy million in that offering, correct, They they raised it at seven and the rock is now correct seem Thank you so much, greatly appreciated his thoughts on Zilla. We really focused there

on one security uh this time around. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keane before the podcast, you can always catch us worldwide. I'm Bloomberg Radio.